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Hewlett-Packard, as much as IBM, is now a bellwether for the IT sector, and its server business didn't do so hot in its fiscal third quarter ended July 31.

As we reported Tuesday, HP's overall sales in its fiscal third quarter slid by 2.1 per cent to $27.45bn, and net income was whacked by 19 per cent to $1.64bn.

The company's server business took the brunt of the hit. Sales in its enterprise storage and servers division, which sells HP's ProLiant x64 and Integrity Itanium iron as well as its myriad StorageWorks disk arrays and tape products, fell by 22.8 per cent to $3.66bn. Earnings from operations in this division fell by 34.6 per cent to $356m.

It is telling, perhaps, of how tough it is in the server racket right now when HP's personal systems group - which makes PCs - posted operating earnings of $386m, down 34.2 per cent but yielding more dough to the middle line than all of the company's presumably more profitable servers and storage.

No part of the Enterprise Storage and Servers empire was immune to the effects of the server crunch that has been hammering the market for several quarters. Within the Industry Standard Servers unit, which is where the ProLiant rack, tower, and blade servers and the BladeSystems chasses that house the blades come from, sales fell by 21.3 per cent to $2.26bn.

Cathie Lesjak, HP's chief financial officer, said the new ProLiant G6 servers, which used the latest Intel Nehalem EP Xeon 5500 and AMD Istanbul Opteron 2400 and 8400 processors, helped push revenues up 14 per cent compared to the second fiscal quarter.

Mark Hurd, HP's chairman, president, and chief executive, said in a conference call with Wall St he was encouraged that ProLiant G6 sales had picked up at the end of Q3. Lesjak said HP was anticipating that it had made market share gains despite its contraction for x64 server sales year-on-year. Other vendors are doing worse when it comes to x64 box sales.

The Business Critical Systems unit, which is where those Itanium servers and some ancient parts for PA-RISC and Alpha systems come from, declined by staggering 30.3 per cent, to $578m. Lesjak blamed "a continued elongation of customer decision cycles" for the declines at the BCS unit.

HP's disk and tape storage business fell by 21 per cent to $820m, but was flat sequentially compared to the second quarter. This was driven, Lesjak said, by stabilization in the Americas region when it came to storage.

Looking ahead to what most industry analysts are predicting is a stabilizing server market, Hurd was optimistic about HP's prospects for the next couple of quarters.

"I think right now what is a very important time in the market because from an enterprise perspective," Hurd explained. "Most of our customers are now doing the planning for 2010 and we expect that 2010 will be a better year than 2009. I think the important thing will be how customers choose to spend that money."

And HP is rubbing its hands together in anticipation, since the installed bases of servers and storage that were plunked in two, three, or even four years ago is aging and at some point, it has to be replaced.

"One of the big issues for us is what share position do we have," Hurd said. "Our share position now is stronger than it was in the past, so we'll be competing against many incumbents' non-HP installed base that will come up for bid in 2010. So we'll have to see how we fare." ®